Aarons 2006 Annual Report Download - page 39

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approximated $.4 million. The excess cost over the fair value
of the assets and liabilities acquired in 2005, representing
goodwill was $24.7 million. The fair value of acquired separately
identifiable intangible assets included $2.6 million for customer
lists and $.4 million for acquired franchise development rights.
The estimated amortization of these customer lists and acquired
franchise development rights in future years approximates $1.8
million, $912,000, $82,000, $60,000, and $52,000 for 2006,
2007, 2008, 2009, and 2010, respectively.
The results of operations of the acquired businesses are
included in the Company’s results of operations from their dates
of acquisition. The effect of these acquisitions on the 2006,
2005 and 2004 consolidated financial statements was
not significant.
The Company sold three, five, and two of its sales and lease
ownership locations to franchisees in 2006, 2005, and 2004,
respectively. The effect of these sales on the consolidated finan-
cial statements was not significant. The Company also sold the
assets of 12 of its sales and lease ownership locations in Puerto
Rico to an unrelated third party in the second quarter of 2006.
The Company received $16.0 million in cash proceeds, recognized
a $7.2 million gain, and disposed of goodwill of $1.0 million in
conjunction with the 2006 sales.
NOTE K: SEGMENTS
DESCRIPTION OF PRODUCTS AND SERVICES OF
REPORTABLE SEGMENTS
Aaron Rents, Inc. has four reportable segments: sales and lease
ownership, corporate furnishings (formerly known as rent-to-
rent), franchise, and manufacturing. The sales and lease owner-
ship division offers electronics, residential furniture, appliances,
and computers to consumers primarily on a monthly payment
basis with no credit requirements. The corporate furnishings divi-
sion rents and sells residential and office furniture to businesses
and consumers who meet certain minimum credit requirements.
The Company’s franchise operation sells and supports franchisees
of its sales and lease ownership concept. The manufacturing
division manufactures upholstered furniture, office furniture,
lamps and accessories, and bedding predominantly for use
by the other divisions.
Earnings before income taxes for each reportable segment are
generally determined in accordance with accounting principles
generally accepted in the United States with the following
adjustments:
• A predetermined amount of each reportable segment’s revenues
is charged to the reportable segment as an allocation of
corporate overhead. This allocation was approximately 2.3%
in 2006, 2005, and 2004.
• Accruals related to store closures are not recorded on the
reportable segments’ financial statements, but are rather
maintained and controlled by corporate headquarters.
• The capitalization and amortization of manufacturing variances
are recorded on the consolidated financial statements as part
of Cash to Accrual and Other Adjustments and are not allocated
to the segment that holds the related rental merchandise.
• Advertising expense in the sales and lease ownership division
is estimated at the beginning of each year and then allocated
to the division ratably over time for management reporting
purposes. For financial reporting purposes, advertising expense
is recognized when the related advertising activities occur. The
difference between these two methods is reflected as part of
the Cash to Accrual and Other Adjustments line below.
• Sales and lease ownership rental merchandise write-offs are
recorded using the direct write-off method for management
reporting purposes and using the allowance method for
financial reporting purposes. The difference between these
two methods is reflected as part of the Cash to Accrual and
Other Adjustments line below.
• Interest on borrowings is estimated at the beginning of each
year. Interest is then allocated to operating segments based
on relative total assets.
• Sales and lease ownership revenues are reported on the
cash basis for management reporting purposes.
Revenues in the “Other” category are primarily from leasing
space to unrelated third parties in the corporate headquarters
building and revenues from several minor unrelated activities.
The pre-tax losses in the “Other” category are the net result of
the activity mentioned above, net of the portion of corporate
overhead not allocated to the reportable segments for man-
agement purposes, and the $565,000 and $5.5 million gains
recognized on the sale of marketable securities in 2005 and
2004, respectively.
MEASUREMENT OF SEGMENT PROFIT OR LOSS
AND SEGMENT ASSETS
The Company evaluates performance and allocates resources
based on revenue growth and pre-tax profit or loss from
operations. The accounting policies of the reportable segments
are the same as those described in the summary of significant
accounting policies except that the sales and lease ownership
division revenues and certain other items are presented on
a cash basis. Intersegment sales are completed at internally
negotiated amounts ensuring competitiveness with outside
vendors. Since the intersegment profit and loss affect inventory
valuation, depreciation and cost of goods sold are adjusted
when intersegment profit is eliminated in consolidation.
FACTORS USED BY MANAGEMENT TO IDENTIFY THE
REPORTABLE SEGMENTS
The Company’s reportable segments are business units that
service different customer profiles using distinct payment
arrangements. The reportable segments are each managed
separately because of differences in both customer base
and infrastructure.